Theresa May is right: something must be done about executive pay

Many people were surprised earlier this year when Theresa May launched her bid to be Conservative leader not with a speech on national security or borders, her specialisms as a formidable Home Secretary, but on corporate governance. The term itself drew plenty of blank looks, but the now-Prime Minister had identified, correctly in my view, that there are few things as central to our economic system as how companies are organised and overseen.

At the Institute of Directors, we have been campaigning for over 100 years for good corporate governance. We think that large companies can only be both commercial and ethical with the right checks and balances in place. If you would like an example of how important governance is, just consider what happens when standards slip. The collapse of BHS and the ongoing Sports Direct saga are both directly linked to poor functioning of their boards.

Sir Philip Green answering questions from the Commons Select Committee on Business about the collapse of BHSCredit:
-/Parliament TV/Handout via REUTERS

In the next few days, the Government will release its long-awaited review into corporate governance. I applaud the genuinely consultative approach ministers are taking with business because the issue in question is a thorny one: do we continue with the organisation of capitalism in its current form, or make a break?

Advocates of the status quo should not be surprised that they find themselves increasingly isolated. Writing in The Telegraph in early June, I warned that “there are many politicians, from across the spectrum, who would be very happy to place more burdens on business. To combat excessive or counterproductive new red tape, businesses in the public eye must be seen to be giving a good deal” back to society. An awful lot has happened since then.

In a speech this week, Mrs May drew a direct link between public distrust of business and the Brexit vote. Much the same could be said of Donald Trump’s success in the US presidential election. Bearing this in mind, combined with anger at sky-high pay at some listed companies, and it was only a matter of time before the Government made its move.

May: I want Britain to be the great meritocracy of the world

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Some in business will view this new found political interest in the technical procedures of boardrooms as unfair, given that the UK has long been a leader in pushing for more transparent governance. The 1992 Cadbury Report led to the establishment of a model of regulation which makes public companies comply with a wide-ranging code of practice, or explain why they haven’t. The Financial Reporting Council says that compliance with the code is over 90 per cent. It’s a model that’s been copied internationally.

Nor has regulation stood still. The Coalition government recognised that decisions on directors’ pay seemed to be being made with little reference to shareholders, the people who actually owned the company. As Business Secretary, Vince Cable may have had an occasionally bumpy relationship with business, but he understood the importance of governance, substantially strengthening investor power with a vote on pay policy.

Companies also now have to provide shareholders with a single figure for remuneration, which gives a breakdown of base pay, pension, bonus and so-called "long term incentive plans". Unfortunately, although the data may be more available, it is often opaque and shrouded in financial and accounting jargon.

But there is a more fundamental problem with executive pay at some listed companies. Executives at big firms, talented and hard-working as they certainly are, are not the same as entrepreneurs. They have not taken the whole risk of the venture on themselves; they are instead extremely well-paid managers, at the company normally for a few years. Bob Dudley is one of the most experienced CEOs around, but when he was paid £14 million in a year his company, BP, made record losses, the public shook their heads in amazement.

The public couldn't believe BP's CEO was paid £14 million in a year when the company made record lossesCredit:
Nick Ansell/PA Wire

There is simply a disbelief among the public, and among many IoD members who run smaller businesses, that he would have done any better or worse a job if he’d been paid half as much. In their heart of hearts, many executives know this to be true.

Suggestions to change how pay is set and published, alongside moves to give employees a bigger voice in the boardroom, will be met with resistance from the City old guard. They will be right to point out concerns about crude, kneejerk measures. Trying to force German-style co-determination on companies, for example, by creating extra tiers of governance for workers, would likely be disastrous.

But resisting all reform would be sending a very strong signal to the public that corporate boards have either not noticed public antipathy to big business, or worse, don’t care. So when FTSE boards feel tempted to grumble at the appearance of the Government’s Green Paper, they should remember the words of the ageing Don Fabrizio in Giuseppe di Lampedusa’s novel, The Leopard: “If we want things to stay as they are, things will have to change”.